January natural gas fell slightly at expiration Wednesday as traders see the market in a balancing act between holding technical support and withstanding a storage surplus that is not only wide, but continuing to increase. By the close January shed 2.8 cents to $3.084 and February eased 2.9 cents to $3.121. February crude oil fell $1.98 to $99.36/bbl.

Market technicians see a possible test looming to long-held technical parameters. “The market has major support at the $3.05 level, which it tested last week and bounced off of, and our view from a technical basis is that a close below $3 would be critical,” said Steve Blair, analyst with Rafferty Technical Research in New York. He added that “the next major support is around $2.65. There is now a 20-year uptrend line and at this point in time the trendline is at $2.65 to $2.655. It’s been called the ‘granddaddy’ of trend lines. It’s been tested a number of times within the last 20 years and it has held every single time.”

From a trading perspective Blair agreed that a break below $3.00 support would set up an attractive trade (sale) down to $2.65.

For the moment, though, “the market wants to hover right above $3 and we are having virtually no winter in this area. Relatively minuscule draws from storage compared with the large draws that we had last year is really widening out the year-on-year differential farther and farther and that does not bode well for natural gas,” Blair observed.

Other analysts also see a similar technical situation. The low for February natural gas occurred Dec. 19 when it traded as low as $3.10, but that could soon be history. “Recent reports pegged the $3.060-3.010-2.970 zone [as] key support with $2.600 the next step down from there,” said Walter Zimmermann, vice president at United-ICAP.

“$2.60 is the long-term uptrend line from the lows of 1992, a line that has never, ever been broken. The price action since the $3.050 low of [the] 19th [of] December [January contract] continues to look like a classic ‘I’ve fallen and can’t get up’ pattern. So natgas could be headed to the $2.600 area.”

Fundamental analysts see an ongoing bearish pricing environment. “With the temperature outlook continuing to feature warmer-than-normal readings, implying smaller-than-normal storage withdrawals for the weeks ahead, we’re forecasting a 74 Bcf net withdrawal for the week ended Dec. 23. [It] looks like it might be slightly below some other forecasts,” said Tim Evans with Citi Futures Perspective in New York. His calculations show “the five-year average is for 122 Bcf so this would be a bearish result that will add to the 387 Bcf year-on-five year average storage surplus. In fact, with current temperature forecasts, we see that surplus expanding to 509 Bcf as of Jan. 13. with no particular reason to view that as the end of the bearish trend. Overall, the rising storage surplus could maintain ongoing downward pressure on prices, as the winter has proved benign so far.”

Other analysts see a somewhat similar lean withdrawal. Ritterbusch and Associates is forecasting a pull of 90 Bcf and Bentek Energy expects a pull of 79 Bcf.

MDA Information Systems in its six- to 10-day outlook calls for a brief surge of cool air to hit the East. “The cooldown early looks stronger [Wednesday] and the forecast has been adjusted downward as a result,” it said in a morning report. “While still not long-lasting, a couple/few days worth of belows and much belows are likely across most of the South and East in what is shaping up to be a more variable pattern. Still, it looks as though warm episodes will outweigh cold, however, given the lack of blocking and warm influences from the Pacific patterns. The West should see plenty of warmth persist while under an upper-level ridge. Detail concerns keep confidence around moderate.”

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